Category Archives: Economics

The bars were sponsored by liquor companies, the kitchen by Lufthansa. One room had marble walls, another, cashmere. Hundreds of guests plucked hors d’oeuvres from Plexiglas trays, but when I reached for a passing tray of pigs in blankets, the waitress tried to stop me. “These are for Michael,” she said.

That would be Michael Moore, filmmaker, who was enthroned nearby on a crowded sofa nibbling from a skewer, which did seem less in harmony with his everyman sneakers and populist persona than a sausage wrapped in fried bread. The Monday night party in Manhattan, which spread over two luxurious penthouse suites, was sponsored by Esquire and tricked out with the magazine’s advertisers’ products. The guests were there to celebrate Moore’s latest movie [Capitalism, A Love Story], which had just had its New York premier uptown.

Long-term interest rates are at their lowest levels in half a century. Long-term interest rates are at their highest levels in nearly 20 years. This is shaping up as the worst year in seven decades for the stock market. Of the 10 best days the stock market experienced during those 70 years, six came in 2008. A Wall Street legend who became a hero for forcing Wall Street to treat investors better now admits to defrauding a later generation of investors of $50 billion. A prominent lawyer is said to have embezzled hundreds of millions by selling phony securities to hedge funds. The economists are worried about deflation. They are also fearful of inflation. The U.S. government is lending money to businesses that never could have borrowed from it before. People fear a wave of corporate bankruptcies as companies find they cannot borrow money to repay loans that are due.

This was the year the financial system stopped working. Nearly all the contradictory but accurate statements above can be traced to that fact. […]

the banking industry was in no position to assume its historical role as a lender that patiently waited for loans to be repaid. To the contrary, banks trusted neither their own balance sheets nor those of other banks. For a significant part of the economy, the government became the lender of first and only resort.

For most of 2008, the Federal Reserve and the U.S. Treasury failed to realize that the banking system faced a solvency crisis rather than a liquidity crisis. Efforts to provide liquidity proved ineffectual because no one had confidence in the values of enormous amounts of derivatives and securitizations that the banks owned.

It is more or less self-evident that it’s the whole banking system that needs to be reviewed. As soon as things turned sour, it kind of disappeared from view, apart from few notable exceptions (and nobody would bet they won’t get in trouble in the next few months if not weeks…).

Perhaps we should just accept that as things stand, all banks are ultimately owned by the state. And rather like most major US airlines, banks will periodically make a big, big mess with their accounts.

Millions of gallons of ink must have been consumed in the neverending discussions about the “disaster” represented by the US Government’s decision to let Lehman Brothers fail and disappear. Andrew Ross Sorkin on today’s IHT agrees:

With hindsight, many in the financial industry blame a deepening of the global financial crisis on the government’s decision to let Lehman crumble

I disagree with that analysis, for two very simple reasons. When Lehman was allowed to go bankrupt, a signal was sent to all, saying that not everybody will be rescued. This was in direct contrast with the Japanese Government’s decadal efforts to prop up every financial institution under its watch (that’s why those efforts lasted for a decade or even more).

More importantly, the failure of Lehman Brothers showed everybody what the failure of “just a bank” may mean, with innumerable, overwhelmingly negative consequences propping up even in unlikely places. And this was good: because it is in the human nature to seriously question people advising that something bad may be happening in the near future, and to need a direct experience of that “something bad” before properly reacting.

You can spend every last molecule of your breath explaining a child that eating too many sweets can be painful. But there is nothing like going through a “tummy ache” that will convince the child of changing their way.

And you could transfer yourself back to January 1939 and explain all the reasons for the upcoming Nazi continent-wide monstruosity, but I am sure nobody in the UK or France (or the USA) will agree to go to war until forced to by the pain of circumstance.

And so, had Lehman Brothers been rescued alongside the other relatively large institutions, we would still be discussing the pro’s and con’s of rescue packages. And we would have never known that it takes just a bank to fail, to see a run on money-market funds.

Hindsight will fuel further commentaries on now-defunct Lehman Brothers: and hindsight can be useful to make sense of the world, but only works when there is something to look back at…

Overbloated rewards, periodic bankruptcies, giant inefficiencies, always ready to ask for Governmental handouts…that’s the characteristics shared by national airlines, and an unseemingly large number of banks.

When will anybody take the chance to build a no-frills bank?

Perhaps one or two of the super-rich Sovereign Funds or Oil Magnates will give it a try. They do have the money, after all…and they have just seen lots of it getting burned by professional bankers.

Fingers crossed…after clueless proclamations by clueless European politicians, we can only hope the current “financial crisis” is not a remake of the notorius case of King Charles II’s being “cured to death”…

[On February 2, 1685] Charles […] suddenly uttered a cry of pain and erupted into thrashing fits (most likely from a stroke that produced a brain seizure). A physician […] applied “emergency treatment,” that is, he let sixteen ounces of blood from a vein in the king’s left arm […] Scarburgh drew off an additional eight ounces […]

Unfortunately for the king, he stirred, and this “auspicious sign” was taken to mean that he would benefit from more fluids being extracted from his body. This Scarburgh did with a “volumous Emetic” that induced retching vomiting […]

Again His royal majesty stirred, and this time he was given an enema to extract still more ill humors […] another enema [was] administered […] force-fed an oral purgative […] the doctors shaved his head and smeared it with blistering camphor and mustard plasters […] encouraging frequent urination and the loss of more humors.

The patient, who thus far had felt no pain, spontaneously regained consciousness. The doctors were ecstatic. Their treatment had worked! Surely the king would benefit from more of it. […]

No need to dwell into more details of the ordeal. Charles II of England, Scotland and Ireland finally died after 5 days of “treatment”…

That would also explain the otherwise absurd sight of politicians declaring an upcoming Armageddon with one hand, and squabbling for petty gains on the other.

As usual, the only thing to fear is fear itself (and a rushed-up solution). At this rate, the best thing that can happen is that nothing substantive is agreed until after the Presidential Elections. It’s only a month to go. If President Bush is really worried about it all, he can always impose a one-month bank-holiday period 😉

Most academic economists – the economists who do not work for companies likely to benefit from the bailout, nor for the President – are opposed to this plan […]

the total value of outstanding mortgages is $11 trillion […] while the value of insurance contracts written on them is about five times as large. Clearly, Mortgage Backed Securities (MBSs), CDOs and so on, were used as collateral for lots of additional borrowing […] That explains why, as the value of those houses is dropping the whole castle of cards threatens to crumble. […]

The problem in banking is the possibility of cascading failures, that the failure of bad banks may drag down the good banks […]

What is the solution? One is for the government to step in and buy securities, as proposed in the bailout plan before Congress.

[If those securities are not properly valued, the government] will only get securities worth less than that with the taxholder responsible for the difference. Notice that the ones who reap the rewards are the holders of bad securities […] In effect in order to keep the bad banks from driving out the good we rescue the bad banks.

There are many alternative schemes to the one proposed by Treasury:

Require banks to raise more capital. [In that case] the losses are borne by the good banks rather than the taxpayer

Forgive debt in exchange for equity. [It is well known that] debt forgiveness schemes have worked for resolving financial crises in the past.

Buy foreclosed houses for the value of the mortgage

Force an orderly winding down of the housing based derivative market […]

Yes: there can be cascading bank failures and that is a bad thing. But it does not happen instantly, not tomorrow, not next week, not next month […]

The bottom line, in the immediate future, is this. The Federal Reserve Bank and its sister agencies […] already have strong tools against a cascading failure of the banking system. […] We have not seen good banks fail, nor have we seen cascading failures. We have been given no reason to think anything of the sort is imminent. […]

To debunk the obvious: Washington Mutual failed Thursday night. Washington Mutual ATM cards continue to function as usual. […] The fact that banks are reluctant to lend to each other does not have much impact on their ability to make short term loans to customers. […]

If the Federal Reserve Bank and Treasury in fact have information that things are worse than Bernanke reported they should tell us what it is. Otherwise they should stand up and make it clear that doomsday is not around the corner.

I am glad to see that the U.S. Federal Reserve and the Bush Admnistration are giving clear instructions on how to succeed in business in America.

Apparently, all you have to do is to make your Company “too big to fail” (TBTF).

Then if anything untowards risks happening to it, Bernanke will step in and save another day. Even if it’s all been your own fault. Even if the Feds have been sitting idly whilst the Company was becoming TBTF.

Directors of TBTFs are surely rejoicing at the idea of unlimited profit opportunities with more or less zero chance of filing for bankruptcy protection, let alone close down the business.

A new wave of acquisitions like there is no tomorrow is surely in order. Obesity does pay, in the US business world.

(No it isn’t: just like trying to earn a living by gambling is not better than having a salary, even if potential returns are much higher)

Is China’s authoritarian capitalism better than liberal democracy (as “the condition and motor of economic development“)? That’s more or less what Slavoj Žižek, co-Director of the International Centre for Humanities at Birkbeck College, asks in the Letters section of the London Review of Books (Vol. 30 No. 8 · Cover date: 24 April 2008), at the end of a singularly even-handed description of the Tibet-China relationship (that by the way only victims of their respective propaganda machines will believe to be a story of good guys vs. bad guys).

Fareed Zakaria has pointed out that democracy can only ‘catch on’ in economically developed countries: if developing countries are ‘prematurely democratised’, the result is a populism that ends in economic catastrophe and political despotism. No wonder that today’s economically most successful Third World countries (Taiwan, South Korea, Chile) embraced full democracy only after a period of authoritarian rule.

Following this path, the Chinese used unencumbered authoritarian state power to control the social costs of the transition to capitalism. The weird combination of capitalism and Communist rule proved not to be a ridiculous paradox, but a blessing. China has developed so fast not in spite of authoritarian Communist rule, but because of it.

There are a few i’s to dot, and t’s to cross in Mr Žižek’s discourse. First of all, Taiwan, South Korea and Chile became “today’s economically most successful Third World countries” after getting rid of “authoritarian rule“. So from those examples it appears that dictatorship may gestate a successful economy, but more often than not “Authoritarian Rule” transforms itself into a suffocating mother, if not an evil stepmother.

More importantly, China itself is in a sense only the last manifestation of a truism: an (economically) enlightened dictatorship can be much more efficient than the collection of dirty tricks known as democracy. Voltaire likely believed in that, just as Plato and countless others, and even if it does sound like an elitist concept, it is obvious nevertheless. An intelligent, caring, politically and economically wise Prince can decide for the best of everybody in minutes, rather than wasting months trying to convince, negotiate, win over people, perhaps in interminable parliamentary committees.

Such a Prince can also guarantee decades of good governance, truly a blessing for his (or her) people.

There is a small matter though. Say, your Prince is Octavianus Augustus and peace and prosperity is for everybody. Then comes Tiberius, and things start out ok: only, to worsen with his increasing paranoia.

Things haven’t changed much in the intevening 2,000 years. The trouble with authoritarian rule, hence with authoritarian capitalism, is not its ability to generate prosperity: rather, its perfectly equivalent capacity to degenerate, quickly because almost without control, thereby hampering the growth of that prosperity if not killing it off entirely.

Speaking the language of the financial world: just like a new CEO can resurrect or destroy a Company, so a despotic Prince (or committee of Princes, aka the “Communist Party of China Central Committee“) is a recipe for increased earning opportunities and, for the very same reasons, for an increase in risk.

And that’s something that should definitely be factored in in any judgement about what to choose as “the condition and motor of economic development“. After all, who wants to continuously gamble all of one’s wealth?

Investment bank Bear Sterns has been bailed out by JP Morgan, at least in theory, and by the Federal Reserve, in actual practice. Apparently this is because Bear Sterns is “too big to fail“.

What kind of massive regulatory failure is that?

What organization did allow BS to grow large enough to be “too big to fail”? Step forward…the Federal Reserve!!!

And they haven’t learned any lesson. JP Morgan in all likelihood will gobble up BS after a few weeks. And so, if it isn’t now, then JPM will definitely become “too big to fail”. Is that going to inspire a proper risk management attitude at JPM, one wonders? Of course not: they’ll obviously become even more reckless, getting ready to be bailed out by the Federal Reserve, if things go badly; or to pocket huge amounts of money, if things go well.

Losses are public, that is, profits are private. So much for a capitalist system.

There’s no point in voting at all, for that matter, as a purely logical act. So if you stayed home that day, relax. If you really want to make a difference, buy lottery tickets — your chances of hitting the jackpot are roughly equal to your chances of swinging an election — and devote your winnings to political lobbying.

And don’t bother to read up on the issues, either. “Because the chance of any individual’s vote making any difference to the result is tiny, the benefits of turning an uninformed vote into an informed vote are also tiny,” Mr. Harford writes. “Rationally speaking, why bother?”

To know more about the wisdom behind those statements, visit Tim Harford’s own website, in particular “Your vote doesn’t count“, published on the 10th of November, 2007:

Notoriously, an individual’s vote makes no difference to anything. According to the British election watcher David Boothroyd, in 24 general elections since 1918, each spanning hundreds of parliamentary constituencies (most recently, 646), there has only ever been one valid election where your vote could have made a difference

I find such a reasoning rather underwhelming.

Elections are not made by individual voters, but by the behaviour of many individual voters: and that is what counts when thinking about “making a difference“.

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So on the subject of going to vote or not: imagine (a) the majority of people think the way you do.

If you decide (a.1) to vote then, you know the majority of people will think the same, and will go to vote. Under those circumstances, people that don’t vote are in the minority and it makes little sense to join them: voting is the logical choice.

If you decide (a.2) not to vote, you know the majority of people will not go to vote either. But that means the opinions of whoever goes to vote carry a larger weight than usual: voting is, once again, the logical choice.

Imagine now (b) the majority of people do not think the way you do. If you decide (b.1) to vote, you know the majority of people will not go to vote. All more the reason to go to the polls: voting is, for the third time, the logical choice.

Finally if you decide (b.2) not to vote, the majority of people will vote. Obviously, instead of getting stuck with the idle minority, it will make sense to join the majority: and so voting is… the logical choice.

Voting is always the logical choice: independently from the “difference” a single vote could or could not make.

One only wishes Tim “Undercover Economist” Harford had read under the cover of Hofstadter’s book and expanded his own reasoning to include… reason, instead of limiting himself, in true economic form, to the mere numbers of an election.

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There is one possibility left aside: so-called “voters’ strike”, where people decide to protest en masse hoping their absence will be noted. In this case, there are two potential outcomes: (c) few people participate and (d) many, many people refuse to vote.

Under (c) the strike is a failure, so voting make more sense. And under (d), since very few people vote, it’s definitely time to do it (as in a.2 and b.1 above).

There is no escape to the fact that voting is, from a logical point of view, the only option.

First a quote from Karl Marx himself. I found it in extended length at the blog called “The Sentinel“:

Marx, in his much neglected Economic and Philosophic Manuscripts warned against […] what he termed “crude communism”. Crude communism “appears in a double form; the domination of material property looms so large that it aims to destroy everything which is incapable of being possessed by everyone as private property. It wishes to eliminate talent, etc., by force . . . The role of worker is not abolished but extended to all men. The relation of private property remains the relation of the community to the world of things . . . This communism, which negates the personality of man in every sphere is . . . Universal envy setting itself up as a power, is only camouflaged form of cupidity which re-establishes itself and satisfies itself in a different way. The thoughts of every individual private property are at least directed against any wealthier private property, in the form of envy and the desire to reduce everything to a common level; so that this envy and levelling in fact constitute the essence of competition. Crude communism is only the culmination of such envy and levelling-down on the basis of a preconceived minimum. How little this abolishing of private property represents a genuine appropriation is shown by the abstract negation of the whole world of culture and civilisation, and the regression to the unnatural simplicity of the poor and wantless individual who has not only not surpassed private property but has not even attained to it. The community is only a community of work and of equality of wages paid out by the communal capital, by the community as universal capitalists. The two sides of the relation are raised to a supposed universality; labour as a condition in which everyone is placed, and capital as the acknowledged universality and power of the community.”

Marx was likely talking about Babeuf, but the idea of flattening everybody down to the lowest common poverty has come back into fashion (usually dressed up as “antiglobalization” or “environmentalism”).

Whom do I hate most among the rabble of today? The socialist rabble, the chandala apostles, who undermine the instinct, the pleasure, the worker’s sense of satisfaction with his small existence–who make him envious, who teach him revenge. The source of wrong is never unequal rights but the claim of “equal” rights.

Nietzsche was of course talking about Christians too, but that I’ll leave to another blog…

“Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.

Perhaps it would be better for commentators in European matters to travel and live a bit more around Europe

Letter to The Economist:

Dear Editors

The author of the “Charlemagne” column makes quite a fuss about the alleged ability in EU documents for fish to “fish themselves” (“A fishy tale“, Dec 13).

The incipit and a lot of the sarcasm in the article are about “a daring, if grammatically correct, use of reflexive verbs, so that a ministerial statement blamed undersized hake that se pêchaient et se vendaient, suggesting the fish had fished and sold themselves.”

The actual ploy though appears to be based on “Charlemagne“‘s own challenged relationship with the French language.

Far from being “daring“, “passive impersonal” (or “passive reflexive”) is a very common construct in French and in other languages, with the reflexive pronoun “se” used to avoid the seldom-liked standard passive voice.

No French speaker, and nobody but a person with plenty of negative prejudices against the European Union, would have imagined that anybody had ever suggested that “the fish had fished and sold themselves“.

If you have something to criticise about the EU (and there is plenty of material in that respect!) could you please at least make an effort not to concoct baseless innuendos.